Know your customer (KYC) refers to due diligence activities that financial institutions and other regulated companies must perform to ascertain relevant information from their clients for the purpose of doing business with them. The term is also used to refer to the bank regulation which governs these activities. Know Your Customer processes are also employed by companies of all sizes for the purpose of ensuring their proposed agent’s, consultant’s or distributor’s anti-bribery compliance. Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity.

The regulations require these entities to adopt KYC procedures. It assists them in knowing/understanding the customers and their financial dealings better to monitor their transactions for identification and prevention of suspicious transactions.

KYC Recommendations

KYC controls typically include the following:

– Collection and analysis of basic identity information (referred to in US regulations and practice a “Customer Identification Program” or CIP)
– Name matching against lists of known parties (such as “politically exposed person” or PEP)
– Determination of the customer’s risk in terms of propensity to commit money laundering, terrorist finance, or identity theft
– Creation of an expectation of a customer’s transactional behavior
– Monitoring of a customer’s transactions against their expected behavior and recorded profile as well as that of the customer’s peers

KYC Jurisdiction and Locality

KYC regulations are local and differ from country to country. Jurisdiction is also, on a country to country basis.

Standing for “Anti-money Laundering”, it is a set of procedures, laws or regulations designed to stop the practice of generating income through illegal actions. In most cases, money launderers hide their actions through a series of steps that make it look like money coming from illegal or unethical sources was earned legitimately.

Who has to enforce AML?

In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989.

The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty Recommendations, which provide a comprehensive plan of action needed to fight against money laundering.

The FATF calls upon all countries to take the necessary steps to bring their national systems for combating money laundering and terrorism financing into compliance with the new FATF Recommendations, and to effectively implement these measures.

Again, as in the case of KYC, financial institutions and/or regulated companies are responsible for the implementation of internal AML policies.

AML Jurisdiction and Locality

AML regulations are also local and differ from country to country. Some countries choose a top-down approach, inheriting much of their AML policies from the FATF, while others go for a bottom-up approach and then have to reconcile both policies. Extreme countries where such reconciliation is impossible (generally due to Government unwillingness) are excluded from the FATF membership, with the corollary of increased complications to access the international markets and financing.